Prague is best CEE city for business – survey

Annual poll puts capital at top of Central Europe, but still trailing Western Europe

Since becoming a market economy two decades ago, the Czech Republic has progressed rapidly to become the gateway for Western businesses in Central Europe; so much so, experts say, that it has become saturated, and foreign investments may be on the decline.

In Cushman & Wakefield’s annual survey of the best European cities in which to do business, Prague remained the best city in Central and Eastern Europe (CEE), and out of 500 companies surveyed, 24 said they planned to expand in the city. Prague stayed at No. 21 overall, behind West European locations, and statistics from CzechInvest, a government-operated website that monitors business development, show that foreign investment in the country has actually dropped from 186 projects worth 17 billion Kč last year to 125 projects worth only 7 billion Kč so far in 2010.

Prague’s work force is not quite up to Western standards, Radka Novák, head of the Cushman & Wakefield team in Prague, told The Prague Post. “But the cost of labor is higher than in other capitals, so it’s a contradiction, and probably the reason why some of the companies are looking at other opportunities like in Budapest and Warsaw and potentially Bucharest.”

The bulk of new foreign investments came from expansion plans from companies already established in Prague as opposed to new companies investing here for the first time, she added.

The trends are indicative of the economy’s adolescent status, experts said, as the country shifts from being an emerging economy to entering the field as a major player. Martin Michalov, a spokesman for the Association for Foreign Investment, said the investment drop-off caused by wage growth has not yet been compensated for by investors looking for skilled labor. Even if the number of companies looking to expand has remained steady, higher-skilled workers are hired at a fraction of the size of work forces hired for industry and factories. Additionally, the country’s infrastructure hasn’t been able to keep up with its economy, he said.

“There are still a lot of things left to do to make it equal [with other countries]. The important point is the Czech Republic is really dependent on exports,” Michalov said. “I think the Czech Republic should definitely define strategy sectors that are interesting for us or that we are good at, like nanotechnologies… We are very dependent on the automotive industry, and I think we should diversify more.”

The picture on the ground is a little less clear, as the fluctuations in the economy currently being felt by those at the receiving end of foreign investment are largely due to the economic crisis, making it difficult to perceive larger development trends.

Tewfik Sabongui, managing director of Jones Lang LaSalle in Prague, a commercial real estate company, said there was a major drop-off in company expansion in Prague, but attributed that to the crisis. He added that as the market bounces back, he’s actually expecting an undersupply of office space.

Consulting companies for foreign investors also saw a steep drop-off, according to Boban Stamenkovic, managing director for Ether Consulting, a company that helps foreign investors establish businesses in the country, but agreed that the trend corresponded with the flagging economy.

Nevertheless, experts said regardless of the immediate economic state, there is plenty of legwork left before the Czech Republic will be able to compete with its Western counterparts.

One strategy will be to improve the quality of universities in order to build unique expertise and skill-sets that would entice foreign investors to build partnerships and cooperative programs with the universities, Michalov said.

“None of the Czech universities ranks in the top 200 in Europe, and this is a problem for cooperation with the private sector,” Michalov said. “The universities do know a lot about trends and innovations, but they do not have the know-how to sell it on the commercial market, and this is the job of private companies.” Encouraging more innovation, he said, would also make the country more appealing to angel investors and venture capitalists.

But the major game changer, according to both Novák and Michalov, will be government policy. Michalov said in addition to transparency issues that still make foreign investors wary, what is really lacking is the money.

“The government needs to provide incentives,” Novák said. “Bratislava is winning new investments because they have programs like that, there is not really much more we can do, we have quite a good product – we just need to make it more interesting for newcomers.”